In the period following the 2020 recession, the inflation rate first rose above 4 percent in April 2021. In the months from April 2021 to May 2023, inflation as measured by the CPI
averaged 6.6 percent. Over the same period, the inflation rate as measured by the core PCE was 4.8 percent.
a. Brieffy explain why using the consumer price index (CPI) might yield a rate of inflation different from that found using
the core PCE price index.
The price index includes all goods and services that are in the consumption component of GDP, while the price index includes only the goods and
services that are in the market basket that the Bureau of Labor Statistics uses in calculating it.
b. Explain how the Federal Reserve's choice of a price index to measure inflation can affect monetary policy.
The Fed uses the price index as its preferred measure of inflation. Because food and energy prices tend to be volatile than other prices, using other price
indices as its target for inflation could lead the Fed to either use a more monetary policy than would be warranted to reach its goal of price stability, or to use a
more monetary policy than would be warranted to achieve its goal of high employment.